What Is 5 by 5 Power?
What Is 5 by 5 Power?
By Barclay Palmer Updated June 18, 2022
Reviewed By Pamela Rodriguez Fact Checked By Michael Logan
A 5 by 5 power clause in a trust document gives the beneficiary the right to withdraw either $5,000 or 5% of the fair market value of the trust account per year, whichever is greater. This is in addition to the regular income payout benefit of the trust.
The clause is intended to guarantee the beneficiary a minimum dollar distribution in years in which the assets invested for the trust decline. A trust is established in a will in order to provide a regular annual income to one or more beneficiaries from the assets of the estate.
A 5 by 5 power clause in a trust allows the beneficiaries access to an additional amount each year if needed. The amount is the greater of $5,000 or 5% of the estate assets. One of the greatest powers of the 5 by 5 is that distributions taken by the beneficiary can be written off as deductible.
Understanding 5 by 5 Power in a Trust
A trust is an alternative to a lump-sum inheritance. Instead of willing a large amount of money with no strings attached, a wealthy individual may put the money in a trust. The money is then invested and the heirs are paid a predetermined amount of money annually, usually a percentage of the value of the trust.
The trust may be designed to protect the interests of minor children, infirm heirs, or offspring that the beneficiary, rightly or wrongly, doesn't consider capable of handling a fortune wisely. This allows the beneficiary to still financially benefit, but forces them to work within the budget of the clause.
The 5 by 5 clause may be included to give the heirs access to an additional amount of money yearly without giving them the ability to decimate the value of the estate. It is particularly useful if the annual payment falls short due to a decline in the investments held in the trust.
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